Wading Through Life Insurance Red Tape

Provided By www.investmentoption.org

Buying life insurance is a complicated process, but with the help and advice of an experienced professional it can become easier to understand. The important thing is to remain calm and patient, and try not to become overwhelmed by the amount of information you must grasp in order to understand -- or even choose -- your policy.

For just one company, in 1956, the Unique Manual lists 76 basic policies. On $1,000 death value, the premium rate varies for each year of age of a person starting a contract, and the annual sum of premium rates also varies with the frequency of payment, all the way from once a week to once a year. This company seems to have about 12,000 premium prices on basic policies, and onto these prices some 18 different amounts can be added for extra provisions in the policy.

The manual does not show the scale of extra premiums added as a penalty for low medical or occupational rating of an applicant for insurance. Cash surrender values, per $1,000 death value, vary as premiums do with the kind of policy and the beginning age of an insured person; they also vary with each year that an insured person continues a policy. The company seems to have something like 200,000 cash-surrender rates.

But it is on dividends that a mutual life-insurance company really shines. In one-year dividend rates per $1,000 death value vary about as much as cash values do. A dividend is supposed to reflect a company's actual experience each year, especially the difference between the excessive mortality rate included in the premium and the actual rate. So if a company carries out the theory, it refigures all these dividend rates every year.

The amount of death value in a policy also affects all these charges and refunds. Taken by itself, this is sensible variation, but when applied to hundreds of thousands of rates per $1,000 death value, it multiplies the mess. And, of course, a buyer of life insurance pays for all this red tape.

With life-insurance rates as complex as they are, nobody is going to try to understand them unless he is something of a statistician and has lots of time available. Normally a customer depends on the word of an insurance agent as to what policy to apply for, in what amount and in what company. In the jungle of rates, an honest agent is quite unlikely to understand what he is selling, and a tricky salesman finds it easy to mislead and overload his customers.

On request, a policyholder probably can obtain from a company an annual financial report showing the amount of its various classes of income and expense and of assets and liabilities. But he has no way of knowing whether the premium he personally pays is a fair share of all the premiums collected by the company. And a mutual company tells him nothing as to the relationship between its net gain from operations and the amount it pays him as a dividend. In effect, a company says to a policyholder: "Just trust Papa, and everything will be all right."

This is obviously not an advisable position to be in, and the informed investor will always know when things are going wrong with his investment. On the other hand, the inexperienced or lazy investor is more likely to take the "trust Papa" approach, and he could very well find himself burned in the end because of it.

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